Should I Sell My Home When I Retire?

It depends on your financial situation

Whatever your vision for retirement, you have to consider whether or not you will continue to live in your current home. Some retirees downsize from a house once full of kids. Others want to stay where they’ve lived. Both options have major financial implications, so let's take a look at which option may be better for you.

Key Takeaways

  • Before considering whether to sell your home, consider what your home is worth, how the housing market is performing, and whether your home is ready to be sold.
  • Retirees thinking of selling their home will receive a large influx of funds and will no longer be required to pay property taxes, homeowners insurance, or repairs and maintenance costs.
  • There are also capital gains tax breaks for qualified taxpayers to exclude tax liability on a portion of capital gains.
  • Other retirees may be better off keeping their home if they've paid down their mortgage, have all of their accessibility needs met, and are interested in leaving their home in their will.
  • By keeping their home, retirees can secure a reverse mortgage to obtain cash to cover their monthly expenses or unforeseen costs.

Evaluating Your Housing Situation

Before we look at reasons to sell or stay in your home, it's a great idea to consider all of the factors contributing to your decision. Some of these are within your control, while others are out of your hands. Leading up to your decision to sell or stay, be prepared to answer the following questions:

  • How much is your home worth? if your home isn't quite valued at what you'd expect or if your home has substantially more value than anticipated, you may be more or less financially motivated to sell.
  • What is your remaining mortgage balance? If you sell your home, you'll be forced to pay off the remaining mortgage balance with home sale proceeds. If you've already paid off your mortgage, you will have more after-tax funds.
  • How is the real estate market performing? This is not only relevant in the long-term (i.e. years) but shorter-term (months). Be aware of monetary policy and how the Federal Reserve is controlling interest rates and how this may be impacting the broader housing market. It might be in your best interest to hold onto your property for a while before selling in the future.
  • What is the condition of your home? Sometimes, real estate markets are so hot that people will buy anything. However, your home will attract better interest and offers if it is move-in ready. As you consider whether or not to sell your home, consider what (if any) amount of work you'd put into it before sale.
  • What is your timeline for selling your home? You might be ready to leave your home the day you retire, or you may struggle to part ways with the memories the roof and walls helped create. Your timeline should be a reflection of both the emotional and financial aspects of when you think you'll be ready to leave.

Delaying a home sale until July is more likely to maximize profits, while homes close fastest if sold in March.

Reasons to Sell Your Home in Retirement

There are plenty of reasons to put your home up for sale when you retire. Typically, this strategy begins by selling your home. Then, you have several options ranging from moving in with family, buying a smaller home, moving to a lower cost of living area, or converting to a renter. Here are some of the potential benefits you'll receive by selling your home:

You'll Receive an Influx of Funds

Many people today go into retirement without enough savings. If you own your home outright or have a lot of equity in it, selling could produce the extra funds your retirement accounts need.

The amount of money you'll end up with depends on several factors. First, the housing market and local competition will determine what your house is worth and whether buyers are interested. You'll have to pay down your remaining mortgage and likely be responsible for at least a portion of real estate commissions after the sale. You may also have a potential tax liability on a portion of the profit.

You'll Shed Your Mortgage

For many, a home mortgage is the largest financial responsibility they'll have. Even if you've made substantial progress on paying it down, you may still be tied to a high monthly payment, especially considering your income will likely be smaller in retirement. This may especially be true if your mortgage is a variable rate mortgage and interest rates are unfavorable.

When you sell your home, you will be required to extinguish the remaining debt on your obligation to the bank. Though this will eat into the net cash proceeds you take home, you'll be rid of a long-term liability and will no longer be stuck with the high monthly payment.

You'll Receive a Tax Break

Many retirees are afraid of selling their homes because they are unaware of the tax consequences of doing so. Thankfully, there are favorable tax laws that protect taxpayers that often minimize the tax obligation. Recent changes to capital gains tax legislation allow single taxpayers to exclude $250,000 of capital gains from their return. Married couples filing a joint return can exclude up to $500,00 of profit.

There are some rules around who can and can't use this tax exclusion. In general, you'll have to have lived in your home for two of the past five years before the date you're selling your home. You can only take this exemption once every two years. There are also conditions where the exclusion is not valid; the exclusion can not be taken on property that is not your primary residence or property acquired through a 1031 exchange.

You Eliminate Maintenance Costs

Some retirees are worried they may not have enough funds on hand to cover emergencies. In respect to your home, this may entail needing to repair a roof, replacing a broken hot water heater, or managing a mold outbreak. There's no way to plan for these costs and for some, it's difficult to envision being able to pay for these costs with limited or no income in retirement.

You Avoid High Property Taxes

Similar to maintenance costs, property taxes are often expensive cash outlays. However, property taxes are billed every year and although the amount is known, not paying property taxes may result in a lien being placed on your home. If you've lived in your home long enough, you've likely seen how appreciated home valuations have resulted in much higher assessments. For some, they simply won't have the cash flow to cover the ongoing government assessments.

You Need to Downsize

For some, this is a philosophical topic. For others, it's a financial matter. Living in an oversized house will often result in higher utility costs. Properties with large yards may require more landscaping costs each year. Larger homes with higher valuations will be assessed higher property taxes and insurance premiums. Chances are some of these costs may no longer be in sync with your retirement lifestyle.

You'll Get to Move to Your Dream Home

The perfect home probably also means something different to a retiree than it meant when they were younger. You might have previously looked for a home in the best school district or near a workplace, but you likely have different priorities as a retiree. Moving even a small distance can result in a change of scenery, being closer to family, better amenities, and greater financial freedom.

Consider the financial implications if you move in with your family. Although you may not be charged rent, there are a number of incremental costs like food, utilities, and furnishings that you may still want to cover.

Reasons to Keep Your Home in Retirement

Retirement is a symbol of hard work; after completing a long career, it's time to part ways with employment and begin living a more relaxing, carefree lifestyle that you've earned. While this does lend itself to the idea of not kicking off retirement with a stressful, expensive home sale, it also may make more financial sense to stay where you are and not sell your home in retirement. Here are a few reasons why:

You Might Save Money

Everyone's financial situation is different, but many realize the financial benefits of staying in the home they already own or have substantially paid down. If you've already extinguished your mortgage, you may not even have a monthly payment. If you still have a mortgage, chances are a majority of that payment is going towards an asset you own as opposed to an unrecoverable interest expense.

There are a lot of costs in selling a home: repairs, maintenance, staging, photography, real estate commission, moving trucks, and storage. Depending on how long you've owned your home, you may find your mortgage payment was less than the prevailing rent rates in your market.

You Have Long-Term Inheritance Plans

Many retirees begin thinking about succession planning, and that may start with their home. You may want to leave your successors your property, in which they receive a favorable tax basis on the inheritance. Sentimentality aside, there are financial benefits to be had by avoiding potential capital gains through the sale of your home and inheritance taxes paid by the receipt of specific assets by your estate.

You're Interested in a Reverse Mortgage

A reverse mortgage is the withdrawal of equity from your home. This equity turns into cash flow (much like income) that you can then use to pay monthly bills or unexpected medical expenses. A reverse mortgage allows you to retain ownership of your home but still provide some cash in the case of an emergency.

A reverse mortgage can only be secured if you have equity in your home. For taxpayers that might have recently entered into their mortgage, they may not qualify or not be allowed to take out as much.

Your Home May Requires Little Upgrades

For many, transitioning into retirement is a welcomed change of pace. As you get older, you'll continually need more accessibility and accommodations to ensure your safety and mobility around your home. Your home may already have some of these items. If not, you can at least begin to prepare. By converting back to renting, you have less control over the property and less ability to install, build, create, or customize your living space to meet your need.

Your Mortgage Payment Is Constant

You'll never know what your emergency costs will be or when they occur. Outside of this, more of your expenses are known when you own as opposed to rent. Your mortgage payment is a fixed amount, whereas renters may face steep annual increases from their landlords. In addition, while other expenses like property taxes may slightly increase each year, you know exactly when they get billed and can plan accordingly.

You Receive Different Tax Benefits from Ownership

Owning your own home during retirement comes with its own tax benefits as well. In 2022, married couples filing joint returns can deduct up to $10,000 of property taxes from their Federal income tax return. In addition, income from a reverse mortgage is not taxable. Meanwhile, rent payments are not tax deductible, and investments in non-tax sheltered accounts may be taxed at the highest ordinary tax bracket.

In 2022, the highest individual tax bracket capped out at 37%.

The Psychology of Selling Your Home

There are undeniable psychological aspects of selling your home in retirement that should very much be considered during the process. For some, the financial implications may decide for them. It may simply be too expensive to live in their current home during retirement, or the uncertainty of emergency fund savings is too risky for what they have saved.

The underlying goal should be to make a decision based on both emotional and financial reasoning. Sometimes, one may outweigh the other. However, both must be aligned in the long term to ensure a safe, happy retirement.

What Are the Benefits of Selling My Home When I Retire?

When you sell your home during retirement, you will no longer be responsible for paying a mortgage. You won't have to pay the property taxes, insurance, repairs, or maintenance costs of owning a home. You will incur new types of expenses like rent, renters insurance, and pet deposits/rent, but you will have a large influx of capital from the sale of your home to help cover these costs.

What Taxes Do I Pay When I Sell My Home?

When you sell your home, you may be eligible to defer a portion of the capital gains you collect on the proceeds. If you are single, you may be eligible to exclude $250,000 of profit, while married couples may be able to exclude up to $500,000. These exclusions are subject to eligibility.

Is It More Expensive Owning or Renting?

For most, it is more expensive to own. A mortgage is burdened with monthly interest payments, and owners are responsible for property taxes and more expensive insurance coverage. Homeowners must also pay repairs and maintenance, while renters often defer these costs onto their landlord.

How Can I Tell If I Can Afford to Retire?

When evaluating whether or not you can afford to retire, you need to compare two things: your income/savings and your expenses. Start by see how much money you have saved and what your income will be (i.e. Social Security) when you stop working. Then, estimate what your monthly expenses will be.

If you don't quite have enough income to cover your expenses, repeat the exercise above but factor in whether you do or do not sell your home. In either situation, your expenses will change.

The Bottom Line

When it comes to retirement planning, one of the main assets to consider if your home. For some, it makes sense to sell. For others, it's best to stay where you're at. Evaluate your own financial situation to determine which option is best for you, and consult a financial advisor if you're not sure which path is best.

Article Sources
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  1. Zillow. "When Is the Best Time to Sell A House?"

  2. Internal Revenue Service. "Topic No. 409."

  3. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments For Tax Year 2022."

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